Almost two years ago in American Express Co. v. Italian Colors, SCOTUS significantly narrowed, but did not overrule, the “effective vindication” doctrine, which allows plaintiffs to invalidate an arbitration agreement if it precludes them from effectively vindicating their federal statutory rights.  A decision today from the Eighth Circuit shows just how difficult it is for plaintiffs to take advantage of the effective vindication doctrine after AmEx.

In Torres v. Simpatico, Inc., a putative class of cleaning business franchisees sued the franchisor and related companies for RICO violations.  The defendants moved to compel individual arbitration, based on language in the franchise agreements.  In response, the plaintiffs argued that the arbitration agreement was unconscionable, and that some defendants were non-signatories and therefore could not enforce the arbitration agreement.  The district court compelled individual arbitration and the Eighth Circuit affirmed.

The plaintiffs raised four arguments as to why the arbitration agreement was unconscionable — “first, the costs to arbitrate will exceed the average claimant’s loss; second, the arbitration claimant must pre-pay the filing fee and other pre-hearing fees; third, the prevailing party is entitled to reimbursement of costs and expenses; and fourth, the agreement limits the franchisee’s available remedies.”  (Quoted from district court opinion.)  The plaintiffs noted that their average loss was $6,100, that individual filing fees would be between $775-975, that average daily fees for arbitrators in four cities were between $1300-$1800, and that their cases would likely take three hearing days.  Therefore, plaintiffs argued the costs of individual arbitration would exceed any individual’s damages.

Keeping in mind the statement from AmEx that “[t]he FAA’s command to enforce arbitration agreements trumps any interest in ensuring the prosecution of low-value claims,” the courts were not interested in the comparison between each class member’s damage and their potential costs of arbitration.  Instead, the Eighth Circuit focused on whether plaintiffs had proven that the costs of arbitration were so high that they could not proceed.  It found the plaintiffs’ proof fells short because the arbitrations would not proceed in any of the four cities for which daily rates were provided, and because the plaintiffs themselves did not submit any affidavits stating that they could not afford the costs of arbitration (they relied on an affidavit of their lawyer to that effect).  In short, the Court held “[t]he Appellants failed to carry their burden to show that the costs of individual arbitration ‘are so high as to make access to the forum impracticable’ or to prevent them from effectively vindicating their rights in the arbitral forum.” [With respect to plaintiffs’ complaint about the limitation of remedies, the court found that was an issue for the arbitrator.]

On the issue of whether the non-signatory defendants could enforce the arbitration agreement, the court found two reasons why they could.  First, those non-signatories were third party beneficiaries of the contract under Missouri law.  But second, the arbitration agreement explicitly bound the franchisee to arbitrate disputes with those parties by stating “all controversies, disputes, or claims between us and our affiliates, and our and their respective members, officers, managers, agents, and/or employees, and you . . . must be submitted for binding arbitration.”

This case gives important guidance for any other potential plaintiffs who hope to make a successful argument under the “effective vindication” doctrine.  Notably: put in individual affidavits from each named plaintiff about his or her inability to pay the filing fees and arbitrator fees; get information on arbitrator rates in cities where the plaintiff’s hearing will likely be heard; and use the new CFPB study to add statistics about how often arbitrators award individual claimant’s their arbitration costs.  Conversely, for drafters of arbitration agreements who want to avoid class actions, consider inserting specific language authorizing the arbitrator to award the claimant his or her filing fees or arbitrator fees if the claim is successful.

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By Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com