Muriithi v. Shuttle Express, Inc., 712 F.3d 173 (4th Cir. 2013)
In a recent case involving three different challenges to an
arbitration clause in a franchise agreement, the U.S. Court of
Appeals for the Fourth Circuit held that the arbitration clause was
enforceable despite the agreement's inclusion of (1) a
class-action waiver, (2) a fee-splitting clause, and (3) a one-year
limitations provision.
In Muriithi v. Shuttle Express, Inc., 712 F.3d 173 (4th
Cir. 2013), the plaintiff, Samuel Muriithi, was a driver for
defendant Shuttle Express, a shuttle service operating in the area
of the Baltimore/Washington International Thurgood Marshall
Airport. Muriithi filed suit in federal court against Shuttle
Express, asserting claims under the federal Fair Labor Standards
Act (FLSA) and under Maryland law. He alleged that in 2007 Shuttle
Express had induced him to sign a "Unit Franchise
Agreement" based on misrepresentations about his compensation
and further alleged that the franchise agreement wrongly classified
him as an "independent contractor" or
"franchisee" instead of an "employee." Muriithi
sought to bring the claims as a class action against Shuttle
Express.
Shuttle Express moved to dismiss the complaint for failure to state
a claim or, in the alternative, to compel arbitration under the
Federal Arbitration Act, 9 U.S.C. § 4, based on the following
arbitration clause in the parties' franchise agreement:
. at *3-4. As noted, the agreement also contained a class-action
waiver, a fee-splitting clause, and a one-year limitations
provision.
The district court denied the request to compel arbitration,
holding that although the claims brought by Muriithi were within
the scope of the arbitration clause, the arbitration clause was
unenforceable. Specifically, the district court concluded that
three provisions were unconscionable: First, the court addressed
the arbitration provision's fee-splitting clause, which
provided "[t]he parties shall bear their own costs including
without limitation attorney's fees, and shall each bear
one-half (1/2) of the fees and costs of the arbitrator."
Id. at *4. Based on the district court's review of
Muriithi's 2009 federal income tax return and in light of
Muriithi's argument that the arbitration fees for which he
would be responsible would be more than the amount he could recover
at arbitration, the district court found that the cost of
arbitration would be prohibitively expensive and would improperly
deter arbitration.
Second, the district court found that the class-action waiver
within the arbitration clause was unconscionable because individual
suits were an unrealistic alternative, given that the potential
recovery of each claimant would be less than the arbitration
fees.
Third, the district court considered a provision in the franchise
agreement setting a one-year limitations period on claims relating
to the agreement. The district court held that the contractual
limitations period impermissibly interfered with Muriithi's
statutory rights because the FLSA provides a two-year statute of
limitations.
The district court found that the three provisions were
substantively unconscionable and "so permeated" the
arbitration clause that they could not be severed. As a result, the
court held that the arbitration clause was unenforceable and denied
Shuttle Express's motion to compel arbitration.
The Fourth Circuit reversed, addressing each of the three
provisions in turn and finding that none was unconscionable. First,
the Fourth Circuit addressed the class-action waiver. It explained
that, subsequent to the district court's decision, the U.S.
Supreme Court decided AT&T Mobility LLC v. Concepcion,
131 S. Ct. 1740 (2011), which "prohibited application of the
general contract defense of unconscionability to invalidate an
otherwise valid arbitration agreement" when the defense is
based merely on the agreement's inclusion of a class-action
waiver. Id. at *13. In doing so, the Fourth Circuit
expressly declined to limit Concepcion to the California state law
with which it dealt.
Second, the Fourth Circuit addressed the fee-splitting clause and
found that Muriithi had failed to establish that the arbitration
would be prohibitively expensive. The court explained that Muriithi
was required to make three showings: "(1) the cost of
arbitration; (2) his ability to pay; and (3) the difference in cost
between arbitration of his dispute and litigation."
Id. at *15. The Fourth Circuit explained that the
arbitration clause could be found unconscionable and therefore
unenforceable if Muriithi met the "substantial evidentiary
burden" of showing that the costs would be "'so
prohibitive as to effectively deny the employee access to the
arbitral forum.'" Id. at *16-17 (quoting
Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d
549, 554 (4th Cir. 2001)).
Muriithi, however, failed to meet that burden, according to the
Fourth Circuit. The court found Muriithi had failed to present any
evidence of the costs of arbitration because his only proffer was
based on arbitration fees charged by three arbitrators in an
unrelated matter in the Virgin Islands. The Fourth Circuit also
found Muriithi had failed to establish the value of his claims,
which is necessary in order to calculate fees under the rules of
the American Arbitration Association. Because Muriithi failed to
make those showings, the Fourth Circuit concluded he had not met
his burden of demonstrating prohibitive costs. The court noted that
its conclusion was further supported by the offer made by Shuttle
Express, at oral argument, to pay all arbitration costs; the court
warned, however, that the issue of prohibitive costs would not be
made moot by an "eleventh hour" agreement to disregard
the fee-splitting provision.
Finally, the Fourth Circuit addressed the one-year limitations
provision. It found the limitations provision was not within the
arbitration clause. This was a crucial finding, the court
explained, because a court's determination of whether an
arbitration clause is enforceable under the FAA is based on a
challenge to the arbitration clause in particular, not to the
agreement as a whole. Challenges to the agreement (as opposed to
the arbitration provision) must be raised to the adjudicator
(whether court or arbitrator) only after the court decides the
motion to compel arbitration.
The one-year limitations provision, by its own terms, applied to
"any arbitration, suit, action or other proceeding relating to
this Agreement," not solely to arbitrations. The Fourth
Circuit further noted there was no "overlap" between the
limitations period and the arbitration clause, and the arbitration
clause itself was silent as to a limitations period. The Fourth
Circuit therefore concluded that issues related to the limitations
provision would be reserved for the arbitrator.
Based on its separate analysis of each of the three provisions at
issue, the Fourth Circuit concluded the arbitration agreement was
enforceable. It therefore reversed the opinion of the district
court, vacated the judgment and remanded the matter with
instructions to compel arbitration -- with all costs of arbitration
to be paid by Shuttle Express.
This case provides valuable guidance for understanding the
circumstances under which an arbitration clause may be found to be
enforceable and, more specifically, the standards under which
challenges to such provisions are reviewed by the courts. First,
relying on Concepcion, the Fourth Circuit has now clearly stated
that the mere existence of a class-action waiver is insufficient
for a finding of unconscionability. Second, a party challenging an
arbitration provision on the grounds of prohibitive costs must
satisfy a demanding evidentiary standard. Third, in determining
whether an arbitration clause is enforceable, a court may consider
only the clause itself, not the agreement as a whole. A final
lesson is that a party's offer to disregard a fee-splitting
provision, if made too late, may not prevent a court from
considering whether a fee-splitting clause is unconscionable, but
may bind the party to pay all costs.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
