Who Decides Whether Statute of Limitations in Arbitration Clause Is Too Short?

[author: Liz Kramer]

Arbitration agreements may shorten the statute of limitations that would otherwise be available for claims — but only to a point.  A recent opinion from the First Circuit shows that how a plaintiff frames its argument that the contractual limitations period is unreasonably short can make a difference not only on whether the argument is successful, but who hears the argument.

In Escobar-Noble v. Luxury Hotels Int’l of Puerto Rico, 680 F.3d 118 (1st Cir. 2012), an employee alleged discrimination and retaliation against his employer, the operator of the Ritz-Carlton in San Juan.  His employment agreement called for arbitration, but he asserted that the arbitration agreement impermissibly shortened the limitations period from three years to one year.  He claimed this deprived him of substantive rights afforded by Puerto Rican law.  This triggered both the district court and circuit court to analyze whether the arbitration clause precluded him from “vindicating his statutory cause of action” in arbitration, under the analysis in Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 637 (1985).

The district court decided the arbitration agreement was enforceable, but the First Circuit found the arbitrator should decide whether the statute of limitations was valid.  Because the Court found it was not clear whether Puerto Rican law allows employers to shorten statutory limitations periods for workers, it punted the issue to the arbitrator.

If the employee had characterized his challenge differently, the Court would not have been able to pass the buck (without a delegation provision).  Many plaintiffs argue that because the arbitration clause unreasonably shortens their limitations period, the arbitration agreement is unconscionable.  That argument is addressed by courts (again, unless there is a valid delegation provision empowering arbitrators to decide claims that the arbitration agreement is invalid).  E.g., Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996, 1002 (9th Cir. 2010); Ragone v. Atlantic Video at the Manhattan Center, 2008 WL 4058480 (S.D.N.Y. Aug. 29, 2008).

However, the issue may just be that the First Circuit had too much rum and reggaeton when it issued the Escobar-Noble decision.  The decision not only punts the issue of validity to the arbitrator, but also uses the following words and phrases that necessitate dictionary checks or a chuckle: “quondam employer,” “a gallimaufry of Puerto Rico statutes,” and ”each dispute must stand on its own bottom.”

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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