Case Title: Matter of Lorraine C. Brady v. The Williams Capital Group, L.P.

Citation: 

Docket Number: 

State: new-york

Court: New York Appellate Court

Date: 2010-03-25T00:00:00Z

Document:
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This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 36  
Matter of Lorraine C. Brady,
            Respondent,
        v.
The Williams Capital Group, L.P.
            Appellant,
American Arbitration Association, 
Inc.
            Respondent.
Marc L. Silverman, for appellant.
William H. Roth, for respondent Brady.
JONES, J.:
At issue is whether petitioner met her burden of
demonstrating that an arbitration agreement's provision for the
equal sharing of arbitration fees and costs precluded petitioner
from pursuing her statutory rights in the arbitral forum. 
Because neither lower court made a finding regarding petitioner's
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financial ability, we remit this matter to Supreme Court for a
hearing to determine, in light of the standard we enunciate
today, whether petitioner was financially able to share equally
in the arbitration fees and costs.
On January 19, 1999, respondent Williams Capital Group,
L.P. (Williams), an investment bank and broker-dealer of debt and
equity securities, hired petitioner to sell fixed income
securities.  As a representative of respondent Williams,
petitioner was required to execute a Uniform Application for
Securities Industry Registration or Transfer ("Form U-4") in
order to become registered with the National Association of
Securities Dealers ("NASD").  Accordingly, petitioner, a
"registered" salesperson of fixed income securities, was subject
to NASD rules.  Under NASD Rule 10201 (b), for example, "[a]
claim alleging employment discrimination, including a sexual
harassment claim, in violation of a statute is not required to be
arbitrated.  Such a claim may be arbitrated only if the parties
have agreed to arbitrate it, either before or after the dispute
arose."
In 2000, respondent Williams promulgated an employee
manual that all of its employees, including petitioner, were
required to sign and abide by as a condition of continued
employment.  Incorporated within the employment manual was a
"Mutual Agreement to Arbitrate Claims" ("Arbitration Agreement"
or "Agreement") under which respondent Williams and each of its
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employees agreed (1) that all disputes were to be arbitrated (so
that the parties would enjoy "the benefits of a speedy, impartial
dispute-resolution procedure") and (2) to equally share the fees
and costs of the arbitrator.  At the time the Arbitration
Agreement was entered into, its "equal share" provision was
consistent with respondent American Arbitration Association
("AAA") rules (which provided that parties to an AAA arbitration
would share the cost of the arbitrator's fee).  The Agreement
includes the following provision:
"The Company and I agree that, except as
provided in this Agreement, any arbitration
shall be in accordance with the then-current
Model Employment Arbitration Procedures of
the [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" (emphasis
added).
 
On February 28, 2005, respondent Williams terminated
petitioner's employment.  During each of her five years in the
employ of respondent Williams, petitioner earned $100,000 or
more.  Specifically, she earned $100,000 in 1999, $137,500 in
2000, $324,000 in 2001, $356,000 in 2002, $405,000 in 2003 and
$204,691 in 2004.
Initially, after petitioner's termination, neither
respondent Williams nor petitioner sought to compel arbitration. 
Petitioner, instead, filed a discrimination complaint with the
New York State Division of Human Rights ("DHR").  For a time, she
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and respondent Williams conducted discovery in that forum. 
However, after approximately 8 months, and before any decision
was rendered by DHR, petitioner voluntarily withdrew her
complaint.  
On December 22, 2005, petitioner filed a Demand for
Arbitration with respondent AAA, seeking money damages against
respondent Williams.  Petitioner claimed that respondent Williams
terminated her employment based on her race and/or sex in
violation of Title VII of the Civil Rights Act of 1964, Article
XV of the New York State Executive Law and Title 8 of the New
York City Civil Rights Law.  At the time petitioner filed the
Demand, the AAA rules, which were amended in 2002, required
employers to pay all arbitration expenses and the arbitrator's
compensation (referred to as the AAA's "employer-pays" rule).  
Approximately two weeks later, respondent AAA, by
letter, notified the parties of its determination that the
dispute arose from an "Employer Promulgated Plan," and that the
arbitration would be conducted consistent with respondent AAA's
National Rules for the Resolution of Employment Disputes
("National Rules").  For example, under National Rule 1,
"[t]he parties shall be deemed to have made
these rules a 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."
 
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On or about March 30, 2006, respondent AAA, in
accordance with its "employer-pays" rule, sent respondent
Williams an invoice/statement for $42,300, which represented the
entire advance payment for the arbitrator's compensation.  Citing
the Arbitration Agreement, respondent Williams refused to pay the
entire amount of the arbitrator's compensation, and demanded that
petitioner pay half in accordance with the Arbitration Agreement. 
Petitioner refused to make any payment.
Subsequently, respondent AAA, citing its rules, advised
the parties that petitioner's position was accurate.  After
numerous attempts to secure full payment of the arbitrator's fee
from respondent Williams, the AAA cancelled the arbitration on or
about October 5, 2006.
By verified petition dated October 2, 2006, petitioner
commenced this article 78 proceeding seeking to compel respondent
Williams to pay the arbitrator's fee or to compel respondent AAA
to enter a default judgment against Williams for failing to do
so.  Supreme Court dismissed the petition in its entirety,
holding that the parties' Arbitration Agreement, rather than the
AAA rules, governed.  In addition, the court, citing petitioner's
earnings while she was employed by respondent Williams, rejected
the argument that requiring petitioner to pay half of the
arbitrator's compensation ($21,150) was prohibitively expensive.
In a 3-2 decision, the Appellate Division reversed and
directed respondent Williams to pay the entire arbitration fee
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"subject later to reallocation of those costs by the arbitrator." 
Although the majority agreed with Supreme Court that the AAA
rules did not supercede the Arbitration Agreement, they held that
the "equal share" provision of the Agreement was unenforceable as
against public policy.  In so holding, the majority found that
petitioner met her burden of establishing that the arbitration
fees and costs were so high as to discourage her from vindicating
her state and federal statutory rights in the arbitral forum. 
Finally, the majority, noting that the State favors arbitration,
concluded it was proper to sever the "equal share" provision
rather than void the entire agreement.
According to the dissenting Justices, because
petitioner "failed to present any facts bearing on . . . the
extent of her financial resources and the extent to which the
costs . . . she would incur [--] if the ['equal share'] provision
were enforced [--] would exceed the costs she would incur if she
litigated her claims in court," she was not entitled to a ruling
that the "equal share" provision was unenforceable on public
policy grounds.  Alternatively, the dissenters argued that even
if the provision is unenforceable, the proper remedy was to
disregard, not modify, the Arbitration Agreement.
Respondent Williams appeals as of right pursuant to
CPLR 5601 (a).  We now modify the order of the Appellate Division
and remit to Supreme Court for a hearing concerning petitioner’s
financial ability.
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At the outset we agree with the lower courts that the
terms of the parties' Arbitration Agreement, rather than the AAA
rules, controlled.  In addition, we note (1) "arbitration is a
creature of contract, and it has long been the policy of this
State to interfere as little as possible with the freedom of
consenting parties in structuring their arbitration relationship"
(Credit Suisse First Boston Corp. v Pitofsky, 4 NY3d 149, 155
[2005] [citation and internal quotation marks omitted]) and (2)  
"[t]he court's role is limited to interpretation and enforcement
of the terms agreed to by the parties" (Matter of Salvano v
Merrill Lynch, Pierce, Fenner & Smith, 85 NY2d 173, 182 [1995]). 
Here, the lower courts, in determining the enforceability of the
Arbitration Agreement's fee and cost sharing provision, erred. 
Specifically, in passing on the question before this
Court, Supreme Court focused on the petitioner's earnings during
her five years in respondent Williams's employ, but did not
inquire as to whether petitioner could pay her share of the
arbitrator's fee or whether requiring petitioner to share such
costs could preclude her from pursuing her statutory rights in
the arbitral forum.  The Appellate Division, on the contrary,
focused on the fact that petitioner was unemployed for 18 months
at the time this article 78 proceeding was commenced and the
amount of her share of the arbitration fees and costs under the
Agreement.  
Although these facts are important, they fail to
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resolve the question whether petitioner was financially able to
share the arbitration costs.  Despite their efforts, neither
lower court took into account all of the criteria we find
relevant in resolving the "financial ability" question.  Thus, in
reaching their respective conclusions regarding the
enforceability of the "equal share" provision, the lower courts
erred as a matter of law.  
On the other hand, this Court has never previously set
forth the appropriate basis to address the issue the lower courts
grappled with.  We do so now and remit to Supreme Court for a
hearing in accordance with this approach.  In determining the
relevant factors a court must take into account, we find it
useful to consider how the federal courts have resolved this
query.
In Gilmer v Interstate/Johnson Lane Corp. (500 US 20
[1991]), plaintiff sued his former employer for age
discrimination.  In holding that plaintiff’s claim was subject to
compulsory arbitration pursuant to an arbitration agreement
incorporated in a securities registration application, the United
States Supreme Court reasoned:  (1) statutory claims can be
subject to mandatory arbitration agreements (see 500 US at 35);
(2) such agreements are enforceable because the arbitral forum,
through which statutory claims can be resolved, provides an
adequate alternative to litigation in court (id. at 28); and (3)
“[s]o long as the prospective litigant effectively may vindicate
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[his or her] statutory cause of action in the arbitral forum, the
statute will continue to serve both its remedial and deterrent
function” (500 US at 28, quoting Mitsubishi Motors Corp. v Soler
Chrysler-Plymouth, Inc., 473 US 614, 637 [1985]).
Nearly a decade later the Supreme Court decided Green
Tree Financial Corp-Ala. v Randolph (531 US 79 [2000]).  In Green
Tree, the Supreme Court, applying Gilmer, recognized that “the
existence of large arbitration costs could preclude a litigant  
. . . from effectively vindicating her federal statutory rights
in the arbitral forum” (531 US at 90), a result which cuts
against the broad public policy in favor of arbitration. 
Further, the Supreme Court adopted a case-by-case approach by
ruling that “where . . . a party seeks to invalidate an
arbitration agreement on the ground that arbitration would be
prohibitively expensive, that party bears the burden of showing
the likelihood of incurring [the] costs” that would deter the
party from arbitrating the claim (id. at 92).  Although the Green
Tree Court did not set forth a standard of how detailed a showing
the party seeking to invalidate an arbitration agreement must
make, the Court held the "risk" of “prohibitive costs is too
speculative to justify the invalidation of an arbitration
agreement” (id. at 91).
Taking a cue from Gilmer and Green Tree, the United
States Court of Appeals for the Fourth Circuit decided Bradford v
Rockwell Semiconductor Sys., Inc. (238 F3d 549 [2001]), a case
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involving a fee-splitting provision similar to the provision at
issue here.  In Bradford, the issue was whether a mandatory
arbitration agreement’s fee-splitting provision, which required
an employee to share the arbitration costs, renders the agreement
unenforceable as a matter of law.  The Fourth Circuit, consistent
with the teachings of Green Tree, answered in the negative,
holding that questions as to a fee-splitting provision's
enforceability should be resolved on a case-by-case basis and
that the analysis should focus 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” (Bradford, 238 F3d at 556).
In adopting the standard New York courts are to apply
in resolving the question of a litigant's financial ability, we
are mindful of the strong State policy favoring arbitration
agreements and the equally strong policy requiring the
invalidation of such agreements when they contain terms that
could preclude a litigant from vindicating his/her statutory
rights in the arbitral forum.  We believe that the case-by-case,
fact-specific approach employed by the federal courts (see e.g.
Bradford; Morrison v Circuit City Stores, Inc., 317 F3d 646 [6th
Cir 2003]; Spinetti v Service Corp. Intl., 324 F3d 212, 218 [3d
Cir 2003]), as well as the principles set forth in Gilmer and
Green Tree, properly acknowledge and balance these competing
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policies.  
Based on the foregoing, we hold that in this context,
the issue of a litigant's financial ability is to be resolved on
a case-by-case basis and that the inquiry should at minimum
consider the following questions:  (1) whether the litigant can
pay the arbitration fees and costs; (2) what is the expected cost
differential between arbitration and litigation in court; and (3)
whether the cost differential is so substantial as to deter the
bringing of claims in the arbitral forum (see Bradford, 238 F3d
at 556).  Although a full hearing is not required in all
situations, there should be a written record of the findings
pertaining to a litigant's financial ability.  Finally, we do not
see the need to detail the precise documentation a court should
request to resolve this issue.  Such matters are best left to the
court's discretion.
Because we are remitting this matter for a hearing, we
do not decide what the remedy should be if the "equal share"
provision is found unenforceable.  If that happens, Supreme Court
should decide, in the first instance, whether to sever the clause
and enforce the rest of the Arbitration Agreement, or to offer
petitioner a choice between accepting the "equal share" provision
or bringing a lawsuit in court.
Accordingly, the order of the Appellate Division should
be modified, without costs, by remitting to Supreme Court for
further proceedings in accordance with this opinion and, as so
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modified, affirmed.
*   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *   *
Order modified, without costs, by remitting to Supreme Court, New
York County, for further proceedings in accordance with the
opinion herein and, as so modified, affirmed.  Opinion by Judge
Jones.  Chief Judge Lippman and Judges Ciparick, Graffeo, Read,
Smith and Pigott concur.
Decided March 25, 2010