LILLIAN PEBBLES MORRISON v. CIRCUIT CITY STORES, INC., MARK F. SHANKLE, SR. v. PEP BOYS — MANNY, MOE & JACK, INC.

These cases, consolidated for purposes of en banc review, involve the interaction in the employment context of the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1 et seq., with federal anti-discrimination laws, such as Title VII of the Civil Rights Act of 1964. Both of the employees involved, Lillian Pebbles Morrison and Mark F. Shankle, were required to sign arbitration agreements as conditions of their employment, Morrison with Circuit City Stores, Inc. ("Circuit City"), and Shankle with the Pep Boys-Manny, Moe & Jack, Inc. ("Pep Boys"). Morrison and Shankle both sought to sue their former employers in court for discrimination after termination. In Morrison's case, the district court held that the arbitration agreement was enforceable and thus stayed Morrison's lawsuit pending arbitration. In Shankle's case, the district court held the agreement unenforceable and stayed arbitration pending litigation. We ordered a consolidated en banc hearing to address the important issues presented in these cases regarding mandatory arbitration agreements in the employment context.

The proper resolution of these appeals requires that we carefully reconcile the "liberal federal policy favoring arbitration agreements," Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), with the important rights created and protected by federal civil rights legislation. In the past, many have viewed mandatory arbitration in the employment context and the goals of civil rights legislation as irreconcilable, with the former understood as a means for employers to evade the purposes of the latter. The Supreme Court, however, has repeatedly "rejected generalized attacks on arbitration that rest on suspicion of arbitration as a method of weakening the protections afforded in the substantive law." Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 89-90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) (quotation omitted). See also Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001) (holding that mandatory arbitration agreements in the employment context fall under the FAA).

Instead, the Supreme Court has emphasized that "federal statutory claims may be the subject of arbitration agreements... enforceable pursuant to the FAA because the agreement only determines the choice of forum." EEOC v. Waffle House, Inc., 534 U.S. 279, 295 n. 10, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002). Thus, under the correct reconciliation of the sometimes-perceived conflict between arbitration agreements in the employment context and federal anti-discrimination laws, the choice to arbitrate statutory claims will change only the forum of decision and not the substantive protections afforded by the statutes in question. "By agreeing to arbitrate a statutory claim, a party does not forgo the substantive rights afforded by the statute; it only submits to their resolution in an arbitral, rather than a judicial, forum." Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).

The following resolution of the cases before us attempts and, we believe, achieves such a reconciliation of the liberal policy favoring arbitration and the important goals of federal anti-discrimination statutes. Part I of this opinion provides the factual background of the two cases consolidated in this appeal. Part II addresses the enforceability of cost-splitting provisions in mandatory arbitration agreements subjecting statutory claims to an arbitral forum. After rejecting competing standards in section II.A., we provide in section II.B. a standard for determining whether a cost-splitting provision in an arbitration agreement undermines the purposes of federal anti-discrimination legislation. Consistent with the Supreme Court's holdings in Green Tree and Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991), we adopt a "case-by-case" standard that protects plaintiffs' access to an effective forum, judicial or arbitral, for the vindication of their statutory claims.

Part III addresses Morrison's claims on appeal. After setting out the standard of review in section III.A. and reviewing various state-law contract arguments in section III.B., we hold in section III.C. that the cost-splitting provision in the Circuit City arbitration agreement is not enforceable in the present case. In section III.D., we further hold that provisions in arbitration agreements that limit the remedies available in the arbitral forum, compared to those remedies available in the judicial forum, are also unenforceable. Having held that both the cost-splitting provision and the limitation-of-remedies provision in the Circuit City arbitration agreement are unenforceable, we address the severability of the offending provisions in Morrison's case in section III.E. Given our conclusion that these provisions are severable, we AFFIRM the district court's dismissal of Morrison's claims and its order compelling arbitration, although for reasons different from those provided by the district court.

Part IV addresses Pep Boys' arguments on appeal. In section IV.B., we apply the standard provided in section II.B. and hold that the cost-splitting provision in Pep Boys' arbitration agreement is also unenforceable. Section IV.C. holds that the remainder of the Pep Boys arbitration agreement is enforceable under Tennessee state law and that Shankle's proper remedy for the American Arbitration Association's (AAA's) failure to abide by the terms of the arbitration agreement is to seek a court order, pursuant to § 4 of the FAA, mandating compliance with the terms of the agreement. For these reasons, we AFFIRM the district court's order in Shankle's case in part, REVERSE in part, and REMAND for proceedings consistent with this opinion.

On July 10, 1995, Plaintiff-Appellant Morrison, an African-American female with a bachelor's degree in engineering from the U.S. Air Force Academy and a master's degree in administration from Central Michigan University, submitted an application for a managerial position at a Circuit City store in Cincinnati, Ohio. As part of the application process, Morrison was required to sign a document entitled "Dispute Resolution Agreement." This document contained an arbitration clause that required resolution of all disputes or controversies arising out of employment with Circuit City in an arbitral forum. The application provided that Circuit City would not consider any application for employment unless the arbitration agreement was signed, that all applicants were required to arbitrate any legal dispute relating to their employment with Circuit City, including all state and federal statutory claims, contract claims, and tort claims, that all arbitrations would occur before a neutral arbitrator, and that all such arbitrations would be final and binding. Applicants could withdraw their consent to the arbitration agreement within three days of signing the application, but such action would also constitute withdrawal of their application for employment at Circuit City.

The Circuit City arbitration agreement also provided that all arbitrations were to proceed according to the "Circuit City Dispute Resolution Rules and Procedures." These rules and procedures addressed a variety of arbitral matters, including the time limitations for filing a request for arbitration, the limitation on remedies available to plaintiffs in the arbitral forum, filing fees, the payment of arbitration costs, discovery, and attorney fees. The relevant terms of the rules and procedures in the agreement entered into by Morrison are as follows.1 Rule 4 requires an associate/employee to pay a filing fee of $75 to initiate arbitration and to submit an arbitration request form within one year of "the date on which the Associate knew, or through reasonable diligence should have known, of facts giving rise to the Associate's claim" to avoid waiver of such claim. Joint Appendix ("J.A.") at 129. Rule 5 provides that "Circuit City and the Associate shall participate equally in the selection of an Arbitrator to decide the arbitration" by choosing from among a panel of seven neutral arbitrators provided by Resolute Systems, Inc., or another arbitration service. J.A. at 130.

Pursuant to Rule 13, Circuit City is required to advance all costs for the arbitration (except for the $75 filing fee), but each party is required to pay one-half of the costs of arbitration following the issuance of an arbitration award, unless the arbitrator decides to use her discretionary power to require the losing party to pay all arbitration costs. Such costs include "the daily or hourly fees and expenses (including travel) of the Arbitrator who decides the case, filing or administrative fees charged by the Arbitration Service, the cost of a reporter [to] transcribe[] the proceeding, and expenses of renting a room in which the arbitration is held," as well as incidental costs such as "photocopying or the costs of producing witnesses or proof." J.A. at 134. Rule 13 further provides that all arbitration costs must be paid within ninety calendar days of the issuance of the arbitration award. In addition, that rule provides that, if an employee is able to pay her share of the arbitration costs within this ninety day period, her costs (not including attorney fees) are then limited to the greater of either five hundred dollars or three percent of her most recent annual compensation. An employee who is not able to arrange to pay this amount within ninety days of the award's issuance, however, must pay her entire share of the costs. Circuit City also reserves the right to deduct up to five percent of the employee's compensation per pay period to satisfy any outstanding obligation.

In addition to the costs of arbitration, Rule 13 also states that each party is responsible for its own attorney fees. The rule, however, also gives the arbitrator discretion to award reasonable attorney fees to the employee if she prevails at the arbitration hearing or to Circuit City if the arbitrator finds "that the Associate's claim was frivolous, or presented in bad faith or for an improper purpose, such as to harass the Company." J.A. at 135.

Rule 8 addresses discovery procedures for arbitration, entitling every claimant to documents in her personnel file but limiting each party to one set of twenty interrogatories, including subparts, and three depositions. Any additional discovery would be permitted only upon a showing of substantial need, and all discovery would have to be completed within ninety calendar days after the selection of an arbitrator.

Rule 14 lists the remedies that an arbitrator may award an associate, including injunctive relief, back pay, front pay, compensatory damages, and punitive damages. Rule 14 also places limits on the amount of monetary damages that may be awarded, allowing for twelve months of back pay, starting "from the point at which the Associate knew or should have known of the events giving rise to the alleged violation," and allowing any back pay award to be "reduced by interim earnings, public or private benefits received, and amounts that could have been received with reasonable diligence." J.A. at 135. Additionally, Rule 14 states that an arbitrator may award only up to twenty-four months of front pay and limits any award of punitive damages to the greater of $5,000 or an amount equal to the sum of the front and back pay awards.

Finally, Rule 12 requires the arbitrator to present a written copy of the award within twenty-one calendar days after receipt of post-hearing briefs, if any, and Rule 19 provides that "Circuit City may alter or terminate the Agreement and these Dispute Resolution Rules and Procedures on December 31st of any year upon giving 30 calendar days written notice to Associates." J.A. at 136.

Morrison began her employment at Circuit City on or about December 1, 1995. Two years later, on December 12, 1997, she was terminated. Morrison alleges that her termination was the result of race and sex discrimination. She filed this lawsuit on December 11, 1998, in Ohio state court, alleging federal and state claims of race and sex discrimination, a violation of Ohio public policy, and a promissory estoppel claim. Circuit City removed the case to federal court and then moved to compel arbitration and to dismiss Morrison's claims. The district court granted Circuit City's motion, rejecting Morrison's arguments that the arbitration agreement was unenforceable under federal and state law.

Morrison's appeal followed. Because the arbitration was not stayed below, however, in April 2000, Morrison and Circuit City participated in an arbitration hearing on her claims, and on July 14, 2000, the arbitrator issued an award. Neither Morrison nor Circuit City has sought to vacate, modify, or correct the award, and the period in which judicial review of the arbitrator's award might have been sought has expired. For this reason, Circuit City moved this court to dismiss this appeal as moot. We denied that motion on January 17, 2002.2

The case was originally argued before a hearing panel on January 26, 2001. A majority of the active judges of the court voted to rehear the case en banc, the court issued an order for rehearing en banc on October 17, 2001, and the consolidated rehearing with Shankle v. Pep Boys-Manny, Moe & Jack, Inc., No. 99-5897, was held on March 20, 2002.

Plaintiff-Appellee Shankle was employed at a Pep Boys store in Nashville, Tennessee, from January 25, 1997, through May 21, 1998. Shankle executed a "Mutual Agreement to Arbitrate Claims" as a condition of his employment with Pep Boys. The relevant provisions of that agreement state:

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 American Arbitration Association ("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.

The Arbitrator shall be selected as follows. The AAA shall give each party a list of 11 arbitrators drawn from its panel of labor-management dispute arbitrators. Each party may strike all names on the list it deems unacceptable. If only one common name remains on the list of all parties, that individual shall be designated as the Arbitrator. If more than one common name remains on the lists of all parties, the parties shall strike names alternatively until only one remains. The party who did not initiate the claim shall strike first. If no common name remains on the list of all parties, the AAA shall furnish an additional list or lists until the Arbitrator is selected.

The Company and I shall equally share the costs of the Arbitrator's fee, in the amount and manner determined by the Arbitrator, ten days before the first day of the hearing. Each party shall pay for its own costs and attorneys' fees, if any. However, if any party prevails on a statutory claim which affords the prevailing party attorneys' fees, or if there is a written agreement providing for fees, the Arbitrator may award reasonable fees to the prevailing party.

After Shankle quit his job with Pep Boys, he consulted a law firm with respect to obtaining severance pay; when this law firm contacted Pep Boys, the company informed the law firm that Shankle would have to arbitrate claims against it, pursuant to the arbitration agreement. Based on this information, Shankle initiated arbitration proceedings on August 4, 1998. Then, on September 3, 1998, Shankle retained new counsel; apparently on the advice of his new counsel, Shankle filed suit in state court, alleging, inter alia, violations of Title VII, and attempted to withdraw from the arbitration proceedings that he had earlier initiated.

Pep Boys removed the case to federal court and then moved, on November 6, 1998, to stay the litigation pending arbitration and to stay discovery. Pep Boys argued that Shankle's lawsuit should be stayed because of the arbitration agreement, which Pep Boys argued required Shankle to pursue his claims through mandatory arbitration. In its supporting memorandum, Pep Boys also argued that the cost-splitting provision in the arbitration agreement was enforceable.

The district court denied Pep Boys' motions and granted Shankle's motion to stay arbitration on June 1, 1999. The district court held that the cost-splitting provision in the arbitration agreement was invalid and unenforceable. The district court further held that the remainder of the agreement did not constitute a valid and enforceable contract under Tennessee state law, because discrepancies between the procedures actually being followed in the AAA proceedings and the procedures described in the arbitration agreement demonstrated that "there was no meeting of the minds as to the procedures to be followed during the arbitration." J.A. at 30. The district court pointed to a number of discrepancies between the AAA procedures and the arbitration agreement. The AAA, as the entity conducting the arbitration, for example, was following its own procedures, although the agreement specified that the procedures described in it would be followed. Additionally, there were irregularities in the selection of the arbitrator and differences in the availability of discovery and evidentiary rules under the two sets of procedures.

Pep Boys filed a timely notice of appeal, and the case was argued on June 16, 2000, before a hearing panel. A majority of the active judges of the court voted for rehearing en banc. The court issued an order for rehearing en banc on October 17, 2001, and the consolidated rehearing with Morrison v. Circuit City Stores, Inc., No. 99-4099, was held on March 20, 2002. Unlike in Morrison's case, arbitration was stayed, and thus the arbitrator never issued a decision or an award in Shankle's case.

Both Morrison and Shankle argue on appeal that the cost-splitting provisions in the arbitration agreements at issue in their respective cases have the effect of denying them effective fora for the vindication of their statutory rights. The Supreme Court has made clear that statutory rights, such as those created by Title VII, may be subject to mandatory arbitration only if the arbitral forum permits the effective vindication of those rights. "So long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum, the statute will continue to serve both its remedial and deterrent function." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 28, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (quotation omitted). If, then, the splitting or sharing of the costs of the arbitral forum under a particular arbitration agreement effectively prevents the vindication of a plaintiff's statutory rights, those rights cannot be subject to mandatory arbitration under that agreement. See, e.g., Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752, 763 (5th Cir.1999) (holding that Gilmer "plainly indicates that an arbitral cost allocation scheme may not be used to prevent effective vindication of federal statutory claims"), cert. denied, 529 U.S. 1099, 120 S.Ct. 1833, 146 L.Ed.2d 777 (2000); Shankle v. B-G Maint. Mgmt. of Col., Inc., 163 F.3d 1230, 1234 (10th Cir.1999) ("[A]n arbitration agreement that prohibits the use of the judicial forum as a means of resolving statutory claims must also provide for an effective and accessible alternative forum.").

The arbitration of statutory claims must be accessible to potential litigants as well as adequate to protect the rights in question so that arbitration, like the judicial resolution of disputes, will "further broader social purposes." Gilmer, 500 U.S. at 28, 111 S.Ct. 1647. To put the matter in a slightly different way, employers should not be permitted to draft arbitration agreements that deter a substantial number of potential litigants from seeking any forum for the vindication of their rights. To allow this would fatally undermine the federal anti-discrimination statutes, as it would enable employers to evade the requirements of federal law altogether.

Although the Tenth,4 Eleventh,5 and D.C.6 Circuits have suggested that such cost-splitting provisions per se deny litigants an effective forum for the vindication of their statutory rights, most courts, including this one,7 that have addressed this question have held that this issue must be decided on a case-by-case basis. In Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000), the Supreme Court adopted a case-by-case approach to determining whether a cost-splitting provision in an arbitration agreement denies potential litigants the opportunity to vindicate their statutory rights. On this point, the Court commented:

It may well be that the existence of large arbitration costs could preclude a litigant such as Randolph from effectively vindicating her federal statutory rights in the arbitral forum. But the record does not show that Randolph will bear such costs if she goes to arbitration. Indeed, [the record] contains hardly any information on the matter. As the [Eleventh Circuit] recognized, "we lack ... information about how claimants fare under Green Tree's arbitration clause." 178 F.3d, at 1158. The record reveals only the arbitration agreement's silence on the subject, and that fact alone is plainly insufficient to render it unenforceable. The "risk" that Randolph will be saddled with prohibitive costs is too speculative to justify the invalidation of an arbitration agreement.

To invalidate the agreement on that basis would undermine the "liberal federal policy favoring arbitration agreements." Moses H. Cone Memorial Hospital, 460 U.S. at 24, 103 S.Ct. 927, 74 L.Ed.2d 765. It would also conflict with our prior holdings that the party resisting arbitration bears the burden of proving that the claims at issue are unsuitable for arbitration. See Gilmer, supra, at 26, 500 U.S. 20, 111 S.Ct. 1647, 114 L.Ed.2d 26; McMahon, supra, at 227, 482 U.S. 220, 107 S.Ct. 2332, 96 L.Ed.2d 185.... [W]here, as here, 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 such costs. Randolph did not meet that burden. How detailed the showing of prohibitive expense must be before the party seeking arbitration must come forward with contrary evidence is a matter we need not discuss; for in this case ... there [was no] timely showing at all on the point.

Id. at 91-92, 121 S.Ct. 513 (footnote omitted).

We believe that the following propositions of law can be derived from Green Tree. First, in some cases, the potential of incurring large arbitration costs and fees will deter potential litigants from seeking to vindicate their rights in the arbitral forum. Under Gilmer, the arbitral forum must provide litigants with an effective substitute for the judicial forum; if the fees and costs of the arbitral forum deter potential litigants, then that forum is clearly not an effective, or even adequate, substitute for the judicial forum. Second, where that prospect deters potential litigants, the arbitration agreement, or, at minimum, the cost-splitting provision contained within it, is unenforceable under Gilmer. Third, the burden of demonstrating that incurring such costs is likely under a given set of circumstances rests, at least initially, with the party opposing arbitration.

However, Green Tree does not provide us with a standard for "[h]ow detailed the showing of prohibitive expenses must be" to support the conclusion that the provision, at minimum, is unenforceable. In that case, of course, the plaintiff had relied solely on the arbitration agreement's silence on the allocation of arbitration costs, and thus the risk of incurring such prohibitive costs was highly speculative, indeed. In the cases before us, however, the arbitration agreements explicitly provide for cost-splitting. Thus, we must determine the appropriate standard for determining whether a cost-splitting provision contained in an arbitration agreement is invalid.

The Fourth Circuit has posited such a standard. In Bradford v. Rockwell Semi-conductor Systems, Inc., 238 F.3d 549, 556 (4th Cir.2001), that court set forth the following test:

[T]he appropriate inquiry is one that evaluates whether the arbitral forum in a particular case is an adequate and accessible substitute to litigation, i.e., a case-by-case analysis that focuses, among other things, upon the claimant's ability to pay the arbitration fees and costs, the expected cost differential between arbitration and litigation in court, and whether that cost differential is so substantial as to deter the bringing of claims.... [T]he proper inquiry under Gilmer is not where the money goes but rather the amount of money that ultimately will be paid by the claimant. Indeed, we fail to see how a claimant could be deterred from pursuing his statutory rights in arbitration ... where the overall cost of arbitration is otherwise equal to or less than the cost of litigation in court.

Id. (citations omitted). Under Bradford, the inquiry can be broken into three parts: (1) the potential litigant's ability to pay arbitration costs and fees; (2) the difference between the expected cost of arbitration to the litigant and the expected cost of a judicial forum; and (3) whether that difference "is so substantial as to deter the bringing of claims" in the arbitral forum. With respect to (1) and (2), Bradford emphasized that "an appropriate case-by-case inquiry must focus upon a claimant's expected or actual arbitration costs and his ability to pay those costs, measured against a baseline of the claimant's expected costs for litigation and his ability to pay those costs." Id. n. 5. In keeping with Green Tree, the party opposing arbitration — i.e., the plaintiff — bears the burden of demonstrating these elements. See Bradford, 238 F.3d. at 557.

The Bradford test and similar approaches, however, suffer from at least two infirmities. First, requiring the plaintiff to come forward with concrete estimates of anticipated or expected arbitration costs asks too much at this initial stage in the proceedings. Before an arbitrator has been selected, for example, a plaintiff can only estimate the hourly rate that the arbitrator will charge. Under the Bradford case-by-case approach, such average figures may appear "too speculative" to support a finding that the costs are prohibitively expensive, even though the plaintiff has no other evidence of costs. Moreover, where arbitration agreements provide for the shifting of fees and costs by the arbitrator on the basis of the arbitrator's decision on the merits, potential litigants (and reviewing courts) may not be able to gauge the likelihood of success or cost-shifting, especially prior to discovery.

One solution that some courts have suggested for the problem of providing evidence of the costs of arbitration is to require litigants to arbitrate their claims first and then to argue, upon judicial review of the arbitration award, that the costs that have been assessed are unreasonable. This solution is discussed and rejected in part II.A. infra.

Second, the Bradford case-by-case approach is inadequate to protect the deterrent functions of the federal anti-discrimination statutes at issue. The issue is not only whether an individual claimant would be precluded from effectively vindicating his or her rights in an arbitral forum by the risk of incurring substantial costs, but also whether other similarly situated individuals would be deterred by those risks as well. A cost-splitting provision should be held unenforceable whenever it would have the "chilling effect" of deterring a substantial number of potential litigants from seeking to vindicate their statutory rights. This issue is addressed in part II.B. infra.

A. Post Hoc Judicial Review of Arbitration Costs

A number of courts have suggested that judicial review of arbitration awards will adequately safeguard the remedial and deterrent functions of federal anti-discrimination statutes. See, e.g., Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 170 F.3d 1, 16 (1st Cir.1999) ("[I]f unreasonable fees were to be imposed ... the argument ... could be presented by the employee to the reviewing court."); Koveleskie v. SBC Capital Mkts., Inc., 167 F.3d 361, 366 (7th Cir.) ("[W]e are convinced that judicial review of arbitration awards is sufficient to protect statutory rights."), cert. denied, 528 U.S. 811, 120 S.Ct. 44, 145 L.Ed.2d 40 (1999); Boyd v. Town of Hayneville, 144 F.Supp.2d 1272, 1280-81 (M.D.Ala.2001) (noting that "judicial review" of any arbitration award is available in rejecting argument that potential costs of arbitration were excessive); Arakawa v. Japan Network Group, 56 F.Supp.2d 349, 355 (S.D.N.Y.1999) (maintaining jurisdiction "over any subsequent petition with respect to the award"). Similarly, at least one court has held that the plaintiff should submit the issue of excessive arbitration costs to the arbitrator after the arbitrator reaches a conclusion on the underlying complaint. See Klinedinst v. Tiger Drylac, USA, Inc., No. 01CV040,