How Low Can You Go? Shortening the Statute of Limitations in Arbitration Agreements

[author: Liz Kramer]

I see more and more arbitration agreements that contain their own limitations period (the timeline for bringing a LegoLimbodispute in arbitration).  Are all of those necessarily enforceable?  No. 

In Order of United Commercial Travelers of America v. Wolfe, 331 U.S. 586 (1947), the Supreme Court held that contracts may shorten the statute of limitations so long as the period is reasonable. (This blog has previously addressed who hears the limitations argument — courts or arbitrators.)  However, there are very few hard-and-fast guidelines that courts offer on what amount of time is reasonable in the arbitration context.  Periods as short as ninety days have been found reasonable, while periods as long as two years have been found unreasonable.  See, e.g., Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231, at *1 (D.N.H. Apr. 7, 2004) (upholding ninety-day limitations period); McKee v. AT&T Corp., 191 P.3d 845, 859-60 (Wash. 2008) (invalidating two-year limitations period). 

In determining reasonableness, courts look at the unique facts of each case and the relevant policy considerations.  Here are three factors that will make it less likely for a court to uphold the contract’s limitation period:

  • Unequal bargaining power. Often in the employer-employee context, the court views the employee as the party with weaker bargaining power, less access to counsel and fewer financial resources. For those reasons, whether the limitations period is thirty days or six months, courts are hesitant to enforce these periods when the arbitration agreement is signed on a non-negotiable basis. E.g., Plaskett v. Bechtel Int’l, Inc., 243 F. Supp. 2d 334, 341 (D.V.I. 2003); Openshaw v. FedEx Ground Package Sys., Inc., 731 F. Supp. 2d 987, 992-94 (C.D. Cal. 2010).  On the other hand, in non-employment contexts, such as purchase of property, courts are more likely to find that equal bargaining power existed. E.g., Freeman v. Skogen, No. C5-93-348, 1993 WL 318927 (Minn. Ct. App. Aug. 24, 1993);
  • Precluding recovery under federal law.  In Davis v. O’Melveny & Myers, 485 F.3d 1066 (9th Cir. 2001), for example, the court invalidated a one-year limitations period because it precluded the plaintiff from recovering for continuing violations under the Fair Labor Standards Act, which permits recovery of damages for a two- or three-year period depending on the type of violation; and
  • Lack of mutuality.  Courts are more apt to wipe out provisions that shorten the statute of limitations for one party but allow the other party more time to bring their claims. E.g., Pokorny v. Quixtar, Inc. 601 F.3d 987 (9th Cir. 2010).

The biggest mistake counsel can make, however, when fighting a short limitation period in the arbitration agreement is to not provide justification for the provision’s unreasonableness. The plaintiff in Letourneau v. FedEx Ground Package Sys., Inc., No. Civ. 03-530-B, 2004 WL 758231 (D.N.H. Apr. 7, 2004) was stuck with a ninety-day limitations period for failing to articulate why ninety days was unreasonable under the circumstances of his case.

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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