Washington Appeals Court: Cost-Shifting Provisions in Employment Arbitration Agreement Invalid

In a long-running battle involving the enforceability of an employment arbitration agreement between a Colorado company and its Washington state manager (Walters v. A.A.A. Waterproofing, Inc.), the Washington state Court of Appeals struck two provisions as invalid, but enforced the rest of the agreement.

Washington employers should consider these rulings before entering into arbitration. In many cases, arbitration may not be the best course of action. This advisory provides a brief analysis of the Walters case and offers some tips for employers who are considering going forward with an arbitration agreement.

• First, the court held that a “loser pays all” provision, under which costs and attorney fees are paid by the prevailing party, was unconscionable because the statute under which the employee was asserting claims—the Washington Minimum Wage Act—specifically required the employer to pay the employee’s attorney fees and costs if the employee prevailed, but did not require the employee to pay the employer’s attorney fees and costs if the employer prevailed.
• Second, the court held that a venue provision requiring that the arbitration be held in Denver, the location of the employer’s headquarters, was unconscionable because the employee, who lived and worked in Washington, provided proof that the costs to him of arbitrating out-of-state were prohibitively expensive.

The court severed the venue and fee-shifting terms, consistent with the severability provision of the arbitration agreement, and left the remaining terms of the arbitration agreement intact, ordering the parties to proceed to arbitration. The court underscored that ordinary contract rules otherwise apply in determining the enforceability and interpretation of employment arbitration agreements.

While the Walters case makes clear that Washington employers may use employment arbitration agreements, Washington courts are not enforcing provisions in arbitration agreements that give employers procedural or cost-shifting advantages that they do not already have in the judicial process.

Attorney fees provisions in employment arbitration agreements in Washington after Walters

Washington follows the so-called American rule regarding attorney fees, which says that each party is responsible for its own attorney fees and costs absent a statute, contract or other equitable basis. Unfortunately for Washington employers, there are a number of statutes that create exceptions to the rule and allow an employee to recover attorney fees and costs if he or she is a prevailing party as to claims such as wage loss or discrimination. These statutes do not create a reciprocal right for the employer.

As the Walters decision illustrates, Washington courts view such one-way statutory provisions as a public policy created by the Legislature to encourage employee claims. Consequently, the courts will not enforce an employment arbitration agreement that creates a reciprocal or “loser pays” provision that would expose the employee to attorney fees and costs where a statute expressly provides for recovery of attorney fees by the employee with no reciprocal provision for the employer. In the court’s view, the public policy embodied in the statute trumps a contractual prevailing party provision.

• Drafting tip: There are situations where no statute prevents an employer from requesting attorney fees and costs if the employer prevails. Thus, the Washington Supreme Court has said that employers can include an attorney fee provision giving the arbitrator discretion to award attorney fees to the prevailing party (as opposed to making it mandatory). (Zuver v. Airtouch Communications Inc. (2004)). Permissive language is not substantively unconscionable because it would be speculative to assume that the arbitrator would ignore controlling substantive law regarding the exercise of discretion as to whether or not to award attorney fees to the prevailing party.

Venue provisions in employment arbitration agreements in Washington after Walters

Although it struck the venue provision in Walters, the court held that out-of-state venue provisions are not invalid per se. As with other fee-shifting provisions, such as responsibility for administrative fees, the arbitrator’s fee, and other costs not typically incurred by the employee if the case were brought in court rather than before an arbitrator, Washington courts will evaluate a venue provision to determine whether it will likely render the arbitral forum inaccessible due to prohibitively expensive costs to the employee. The issue must be resolved on a case-by-case basis after examining specific factual information.

The party opposing arbitration has the burden to show that the cost of arbitration is prohibitive by documenting their financial resources, the extra costs of arbitration, and any offer by the other party to defray the cost of arbitration. In Walters, the court found that the travel costs, including the travel expenses of witnesses, for holding the proceedings in Denver rather than Seattle were significant, and that AAA Waterproofing failed to produce specific information demonstrating that Mr. Walters could afford the higher travel expenses of attending arbitration in Denver.

• Negotiating tip: If an employee is claiming that the cost of arbitration is prohibitive, the employer should request the employee identify the extra costs of arbitration (beyond those typically incurred in court litigation) and provide documentation as to the employee’s financial resources. If the employee has presented justification that he is likely to incur excessive costs, the employer should offer to defray some or all of the costs of arbitration if it wants to preserve the arbitral forum. If properly handled, Washington courts will deny an employee’s motion to invalidate the arbitration agreement where the employer has agreed to defray costs. (Zuver v. Airtouch Communications Inc. (2004)).
• Drafting tip: Washington courts are disposed to strike invalid provisions in an arbitration agreement and allow the rest of the agreement to be enforced rather than to invalidate the entire agreement. Severability is particularly likely when the arbitration agreement includes a severability clause. If the employer wants to go to arbitration even if some provisions are struck from the agreement, the employer should include a severability provision. On the other hand, if the employer is only willing to go to arbitration if all the provisions are enforceable, then the agreement should contain a non-severability clause.

Washington employers often find that employment arbitration agreements are not better, faster or cheaper

Many employers have been led to believe that arbitration agreements are inherently beneficial because they allow employers to contract around disadvantages of the judicial process. However, as the Walters case illustrates, the employer may not be able to enforce key provisions of the agreement if courts feel that the provisions are overreaching in favor of the employer. Thus, employers should carefully consider what they can expect to get out of an arbitration agreement before signing it.

Increasingly, employers are finding that arbitrations are not necessarily better, faster or cheaper than administrative or judicial proceedings. Moreover, employers are almost never able to seek judicial review of an adverse arbitration result on appeal.

The employment law defense attorneys at Davis Wright Tremaine can assist employers not only in drafting employment arbitration agreements but also in analyzing whether such agreements make sense legally and strategically. Please contact us if you would like more information or require assistance.