Could Arbitration Of Cost-Prohibitive State Law Claims Be Compelled While Similar Federal Claims Stay In Court? recent decision from a federal district court in Tennessee raises a discrepancy in how the courts treat arbitration agreements that hinder a plaintiff’s state law and federal law claims.  Cases under the FAA state that arbitration agreements cannot be enforced if enforcement means plaintiffs will not be able to effectively vindicate their federal statutory rights (as the DOJ argued recently). But what happens if plaintiffs cannot effective vindicate their rights under state statutes in arbitration?  That is the situation that the court addressed in Dean v. Draughons Junior College, Inc., __ F. Supp. 2d __, 2013 WL 173249 (M.D. Tenn. 2013).

In Dean, a class of students at affiliated junior colleges alleged the colleges violated state statutes by making false representations about their record of placing students in jobs.  The colleges moved to compel arbitration, based on an arbitration agreement with all of the students that included a delegation clause (authorizing the arbitrator to determine even the validity of the arbitration agreement).  The class of students argued that the delegation clause itself was unenforceable, because it was prohibitively expensive for the students to arbitrate the validity of the arbitration agreement.  (There was no class action waiver.)

The court in Dean concluded that Kentucky state law, which governed the dispute, recognized a cost-prohibitiveness defense to arbitration, and it also concluded that the plaintiffs could not pay the costs to arbitrate arbitrability.  (This is the only time I have seen a successful challenge to the delegation clause itself, pursuant to Rent-A-Center.)  However, it then concluded that Kentucky’s case law  — that precluded enforcement of arbitration agreements if those agreements hinder enforcement of state statutes — was preempted under Concepcion, because the doctrine was specific to arbitration agreements.  The court summarized that “although Rent-a-Center indicated that federal district courts could entertain state law challenges to the enforcement of a delegation clause based on [cost], this court construes Concepcion … as precluding the assertion of a Kentucky cost-prohibitiveness defense to the Delegation Clause here.”  Clearly frustrated, the court granted the defendants’ motion to compel arbitration, but noted that “this result strikes the court as manifestly unjust and, perhaps, deserving of legislative attention.”

Not only is this decision interesting because federal judges do not usually say that the Supreme Court’s case law is manifestly unjust, but because it raises a parallel issue to the one before the Supreme Court right now in AmExIII    In AmEx, the Court will (I assume) decide whether federal law will allow plaintiffs to challenge arbitration agreements that make it economically unfeasible to pursue their federal statutory claims.  If that “effective vindication” rule survives for federal statutes, why shouldn’t states be allowed to enforce similar rules for their own statutes?  On the other hand, if SCOTUS strikes down the “effective vindication” rule, then state and federal laws are treated equally.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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